Early reports show that the critical spring home buying season has gotten off to its best start in five years. Sales of new single-family homes totaled 83,000 units during the first quarter, up 16 percent from a year ago, while sales of existing single-family homes rose 7.2 percent, marking the best combined pace for first quarter home sales since 2007. The rise in existing home sales has generated a little excitement, as news is spreading that homes sold outside the foreclosure process are often receiving multiple bids and selling above the asking price.

The sudden prevalence of multiple bids around the country appears to be the result of unseasonably mild winter weather, which brought buyers back into the market to a much greater degree than sellers. The first quarter is typically the slowest quarter of the year, with March being the only busy month. Inventories of existing homes have fallen to just a 6.3-months’ supply, and the inventory of unsold vacant homes has fallen by 353,000 units over the past year. Inventories of new homes continue to decline and are now at a paltry 144,000 units nationwide. Only about one-third of those homes are actually completed. With inventories dwindling, home prices have improved a bit. The Case-Shiller 20-City Home Price Index rose 0.15 percent in February, and the year-over-year decline has moderated to just 3.5 percent. CoreLogic’s price index shows prices declining 2.0 percent over the past year, with prices excluding distressed properties down just 0.8 percent.

The better news on sales and prices, along with near record high affordability and near record low mortgage rates, has encouraged builders to move forward with a few more projects. Starts of new single-family homes rose 16.7 percent during the first quarter, for a total of 104,600 units.

There is even more excitement in the apartment market. Starts of multifamily homes totaled 45,000 units during the first quarter, up 25.3 percent from one year ago, marking the strongest pace for multifamily construction in four years. An improving rental market is driving construction. The latest data from Reis show the national apartment vacancy rates falling 1.3 percentage points over the past year to 4.9 percent and effective rents rising 2.8 percent. Demand for rental units is exceptionally strong. The Census Bureau’s latest housing vacancy rate data show a net increase of 1.5 million occupied rental units over the past year and a 491,000 drop in the number of owner-occupied dwellings. Renters now account for 34.6 percent of the occupied housing stock, the highest proportion in 16 years.

Plenty of Challenges Still Await

To be certain, plenty of problems remain. One reason why existing inventories are so low is because many homeowners are unwilling or unable to put their homes on the market at today’s low prices. The pickup in demand that we have seen recently and the apparent stabilization in home prices is welcome, but is no reason to get carried away. We are not on the cusp of another major boom. Some of the strength in the first quarter was likely pulled forward by unseasonably mild weather in the normally slow months of January and February. Likewise, some of the apparent stability in home prices appears to be due to a slowdown in foreclosure sales and a slight pickup in short sales, which tend to sell at a smaller discount than foreclosures. Foreclosure starts picked up sharply since a settlement was reached regarding foreclosure practices at several major mortgage servicers, and we should see more foreclosure sales later this year.

Even with these caveats, there is no denying that there is real improvement taking place. New and existing home sales have picked up across the country. Pending home sales rose 4.1 percent in March, and February’s previously reported 0.5 percent drop was revised up to a 0.4 percent increase. Consumer confidence surveys and surveys of renters not renewing their leases also point to stronger home sales in coming months. We have slightly raised our forecast for new home sales and new home construction based on the solid gains in sales during the first quarter.

Builders are moving cautiously and are still tending to focus on projects in which lots can be purchased inexpensively, effectively competing against foreclosures and lower-priced existing homes. For the most part, builders are concentrating on smaller homes in submarkets near key employment centers. They are largely avoiding the outer suburbs, in which building was strongest near the end of the boom. Gains are strongest in markets benefitting from the oil and gas boom, namely Houston, where single-family housing permits were up 23.1 percent from the first quarter of last year. Single-family permits have jumped 51.5 percent in Denver over the past year to 1,043 units and are up 24.6 percent in Oklahoma City and 16.1 percent in Dallas.

Activity is also picking up in some of the more overbuilt markets. Phoenix has seen single-family permits jump 54.4 percent over the past year to 2,505 units in the first quarter, and single-family permits are up 31.7 percent in Atlanta and 64.5 percent in Miami-Fort Lauderdale-Pompano Beach. Single family permits are also up close to 50 percent in Orlando over the past year and are up 70 percent in Charlotte to 1,495 units in the first quarter. All of these markets have seen land prices drop significantly. Apartment construction is also up sharply across the country, particularly in rapidly growing markets such as Austin, where multifamily permits are up more than 500 percent over the past year to 3,139 units in the first quarter.